How does a dividend discount model differ from a standard DCF model?

The dividend discount model (DDM) fundamentally differs from a standard discounted cash flow (DCF) model in that it specifically projects dividends as the cash flows to be discounted back to present value. The DDM is used primarily for valuing companies that pay dividends, relying on the assumption that dividends will grow at a constant rate into perpetuity.

In contrast, a standard DCF model typically focuses on free cash flows, which represent the cash generated by a company that is available to be distributed to all securities holders, including both equity and debt holders. Thus, the DCF considers a broader range of cash flows than simply dividends.

The choice mentions free cash flows as part of its distinction from the DDM; however, the DCF model evaluates how all stakeholders can benefit from a company's cash-generating ability, which is usually a more comprehensive measure of overall corporate performance compared to solely dividends.

While shareholder equity and market value considerations may come into play with both models, they are not defining differences in the context of cash flow consideration. Similarly, tax implications might affect the overall valuation, but they are not a core differentiator between the two models. Hence, the emphasis on projecting dividends as opposed to free cash flow succinctly captures the essence of how